TFSAs
TFSAs
The Tax Free Savings Account (TFSA) allows you to save money each year without paying any tax on the investment income (interest, capital gains or dividend income) you earn.
There are so many things you can save for by using a TFSA. It might be to renovate your home, buy a cottage, go on a vacation or save for your child's wedding or your retirement. It could even be just to have emergency funds readily available.
The Basics
To open a TFSA, you will need:
- A valid Canadian Social Insurance Number
- To be at least 18 years old
- To be a Canadian resident
Key facts
| Contribution Deadline |
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| Contribution Limit |
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| Carry Forward |
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| Eligibility |
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| Government benefits |
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| Minimum Age |
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| Maximum Age |
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| Spousal Contribution |
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| Overcontribution penalty |
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| Tax Features |
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| Type of investments |
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| Withdrawals |
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TFSA vs RRSP?
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Which makes more sense? With both, your investment growth is tax-sheltered, but there are important differences:
Product feature TFSAs RRSPs Annual contribution limit $6,000 for 2019 For 2019, 18% of income or $26,500, whichever is lower (increased annually) Tax-deductible contribution No Yes Contribution carry-forward Yes Yes Taxable consequences No tax on growth and no tax on any withdrawals Withholding tax applies if withdrawn prior to RRIF; the amount withdrawn is added to taxable income Maximum age for contributions No Yes (71 years old) Re-contribution of withdrawals Yes (in subsequent calendar year) No (except for Home Buyers’ Plan and Life Long Learning Plan) Overcontribution penalty Yes, 1% per month on over-contribution amounts (even if contribution was withdrawn subsequently in the same tax year) Yes, 1% per month if you exceed the $2,000 lifetime over-contribution amount Basically RRSPs save you taxes now and TFSAs save you taxes later.
TFSA
RRSP
Pre-tax income
$1,000
$1,000
Income tax paid (at 40%)
$400
n/a
Amount invested
$600
$1,000
Value after 20 years (assuming 5.5% growth)
$1,751
$2,918
Tax due when the money is withdrawn (at 40%)
$0
$1,167
Cash in hand after 20 years
$1,751
$1,751
Source: AGF Investments Inc. For illustrative purposes only.
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TFSA vs non-registered savings
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In both accounts, contributions are made with after tax money. However, in a TFSA, any earned interest, capital gains or dividend income remains tax free – but in a non-registered account, any earned income incurs taxes each year.
Product Features TFSAs Cash Accounts Annual contribution limit $6,000 for 2019 No limits Contribution carry-forward Yes N/A Taxable consequences No tax growth and no tax on withdrawals Fully taxable earnings growth Capital loss on Investment Cannot claim Can offset capital gains (three preceding tax years, carried forward indefinitely) Re-contribution of withdrawals Yes (in subsequent calendar year) Yes Overcontribution penalty Yes, 1% per month on over-contribution amounts (even if contribution was withdrawn subsequently in same tax year) N/A Why bother with a TFSA – because tax-sheltered growth can add up
TFSA
Non-registered savings
Initial investment
$5,000
$5,000
Value after 20 years (assuming 5.5% growth and after tax)
$14,589
$10,872
Tax savings
$3,717
N/A
Note: *Investment income earned in the TFSA is not subject to tax therefore the rate of return is 5.5% per year. Investment income earned in the non-registered account is subject to tax at a rate of 28% therefore the after-tax rate of return will be 4% per year (i.e., 5.5%x(1-28%)). The 28% investment tax rate is the weighted average tax rate on an investment portfolio comprised of 30% dividends, 15% capital gains and 40% interest (i.e., (30%+15%+40%)/3).
Source: AGF Investments Inc. For illustrative purposes only.
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TFSA Withdrawals
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You can withdraw your savings tax-free at any time and for any purpose.
Since TFSA withdrawals are not considered income for tax purposes, there is no impact on government benefits – and your TFSA will not affect your eligibility to receive benefits such as the Guaranteed Income Supplement or Old Age Security benefits.
So if you’re saving for retirement, a TFSA can help manage your taxable income since withdrawals from an RRSP or RRIF are fully taxable.
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